Is The Cloud The End Of Microsoft?

As InformationWeek covers Microsoft (NSDQ: MSFT)'s revelations at its Professional Developer Conference this week, it's becoming clear that Microsoft's top brass know they aren't in the same business they were just a few years ago. So is this the transitive stage that spells the end of Microsoft's dominance of the software industry?

I think the question actually applies more broadly. Though I didn't think it was so even just a year ago, it seems to me that the software industry is at an inflection point. Forces are converging to make Software as a Service a viable alternative for businesses of all sizes. It's always been the case that the efficiency offered by multi-tenant single-version systems would allow purpose-built applications to compete on a cost basis with traditional premises based software, particularly for smaller companies. Basically if it's a no-brainer for a company to outsource its payroll, a similar equation applies to most of its IT software. Security and privacy concerns as well as regulatory compliance alone should probably be enough to make most smaller businesses SaaS customers. Pile on remote support and a variety of end user devices, and it really is a no-brainer.

But the equation is changing for large businesses too. Flextronics is a huge customer for Workday and companies like GE and Coke are making moves into SaaS. For them, the complexity of fielding non-critical applications to a world-wide workforce with complexities ranging from device support to language support means SaaS makes sense - at least for some apps.

Clearly Microsoft gets this. Its Azure announcements are all about moving into services based computing. And in typical form, Microsoft sees itself as a player on all levels. It'll provide the bare metal infrastructure, the platform and the applications. It also hopes that its software developer throng will follow suit and create apps on the new platform. Here's where the going gets tough, and where Micorsoft's usual game of announcing a Grand Plan many years before it'll actually have anything to deliver may not work as well as it has in the past.

For one thing, there should be no doubt that PDC announcements about Azure were not aimed centrally at the end users, be they consumers or enterprises. Microsoft is worried about that developers - as it should be. There's no inevitability about Microsoft's success as a cloud platform, and indeed the recent misstep that is Vista, its inexcusably late entry into virtualization and its confusion about how to tackle software services challenge should give everyone pause. But more than that, developers - as faithful as they can be to their favorite platforms - appreciate a system they can understand, use and even write a business plan around.

Microsoft's failure to explain any aspect of its cloud business model renders the rest of its good words about as intelligible as Charlie Brown's teacher. Its competition can tell you exactly how you'll pay for services, and for a developer looking field their own SaaS product that makes all the difference. More than anything, Microsoft is describing what's come to be known as Platform as a Service. The platform is for developers, and developers have to understand how (or whether) they'll make money.

I met recently with CogHead, which is a PaaS provider on top of Amazon (NSDQ: AMZN)'s EC2 and S3. It too wants to attract developers. So what's their business model? The developers can develop their apps for free, CogHead then charges $10 per user per month. I have no idea if that's the right model for developers, but at least they have a chance at figuring out whether a product might make them money.

At a lower level, Amazon itself is certainly a leader in this space, and it may have a better fundamental skill set than Microsoft does for providing hardware and platform services. EC2, S3, Simple DB and Simple Queuing Service look a lot more like the sorts of things that a web oriented developer would like to use than do Live ID and SQL service from Microsoft.

If it's true the Amazon has the right skill set and Microsoft doesn't, it spells trouble for the likes of Oracle and SAP too. Oracle in particular could hurt as its database is often at the heart of shrink wrapped premises software. If there's a good sized shift away from premises software to cloud services, that cash cow could start to look a little anemic.

Like every shift in the software industry, the move to cloud services will never be total. Just as there are still mainframes around, there will be traditional on premises software for a good long time to come, but there will be a shift, and it's where new money will be spent and made. Less than a year ago, I didn't thinkGoogle (NSDQ: GOOG) and Amazon would be players in IT-oriented software and systems (let alone enterprise software and services)- now I'm not so sure.